John Murphy, King of Technical Analysis
Read the article this discussion is about
- Kirk
- Kirk
- Kirk
- Kirk
- Kirk
- Kirk
- Kirk
- arommel88
- Normxxx
- arommel88
This archived discussion is "read only".
For the corresponding "live" discussions, post in the active topic forum here.
» Kirk - 2/8/05: THOUGHTS ON THE YIELD CURVE
.Tue, 8 Feb 2005 5:3 PM ET
THOUGHTS ON THE YIELD CURVE
WHAT DOES IT MEAN? ... Earlier this afternoon I did an interview with Ron Insana on CNBC. Our discussion was about the recent drop in long-term bond yields -- and the implications of the flattening yield curve. I thought I'd elaborate on the subject since it's not easily understood. A normal yield curve has a positive slope moving from left (short-term rates) to right (long-term rates). That's because long-term rates are normally higher than short-term rates. When the economy is weak, the Fed lowers short-term rates. That widens the spread between short and long-term rates (a steeper yield curve) and paves the way for the next economic recovery. At present, the opposite is happening. The Fed started raising short-term rates in the middle of last year. As a result, the spread between short and long-term rates has been narrowing. Normally, a narrowing yield curve takes place when short-term rates are rising faster than long-term rates. What's unusual this time is that long-term rates are actually dropping. The question is whether that's a good or a bad thing.
WHY A NARROWING YIELD CURVE CAN BE DANGEROUS... The danger point in a narrowing yield curve comes when short-term rates move higher than long-term rates. That's called an inverted (or negative) yield curve. The last time that happened was at the start of 2000 and preceded a major bear market and recession. Every recession in the last forty years has been preceded by an inverted yield curve. We're nowhere near that point yet. But we're moving in that direction. Not enough to cause a recession, but maybe enough to cause some economic slowing. Most economists are putting a positive spin on falling bond yields since that's traditionally good for the economy and the stock market. Their view is that falling bond yields are simply a sign of lower inflation expectations. But it's also possible that falling bond yields are hinting at a weaker economy. Bond yields fell sharply last Friday on a weak jobs report. Fourth quarter GDP came in way below expectations and was the weakest of the year. That's also pushed yields lower. The fact that bond prices have done better than stocks so far this year also suggests a more defensive attitude on the part of investors. Then there's the impact of falling bond yields on the yield curve.
FALLING BOND YIELDS MAKES YIELD CURVE FLATTER ... To the extent that a flattening yield curve can become dangerous, a drop in bond yields isn't necessarily a good thing. The Fed has expressed its intention to keep raising short-term rates. If long-term rates continue to drop (or even stay flat), the yield curve will flatten even further. [Rising short-term rates and falling long-term rates narrows the spread between them]. That's not necessarily good for the economy or the stock market. Economists have expressed puzzlement at why bond yields have stayed down so long in the face of a strong economy. The one possible reason that they never seem to consider may be the most obvious -- namely, that the economy isn't as strong as most economists believe that it is.
SECTOR ROTATIONS FAVOR A WEAKER ECONOMY... From a stock market standpoint, I've already expressed my view that the cyclical bull market that started in October 2002 is nearing completion. Any ensuing weakness in the stock market would be a precursor to economic softening. Energy stocks remain the market's strongest sector -- while technology is the weakest. That's a bad combination for the stock market. The fact that consumer staples and utilities have been market leaders early in the new year (along with energy) is a sign that the economic cycle could be peaking. Then there's the January Barometer which gave a negative vote for the market this year. A little known aspect of January's performance is that sector leaders during January often lead for the entire year. And sector laggards often lag for the balance of the year. That's another vote for defensive market sectors -- especially energy. If rising energy shares are hinting at higher oil prices, that's not going to be good for the rest of the market or the economy. Maybe that's what the bond market is anticipating.
-- posted by Kirk
» Kirk - Thu, 17 Feb 2005 6:21 PM ET
.NASDAQ LEADS MARKET DECLINE ON HIGHER VOLUIME -- JUMP IN BOND YIELDS HURTS FINANCIALS -- DOLLAR DROP BOOSTS COMMODITIES
NASDAQ 100 DROPS ON HIGHER VOLUME... The Nasdaq 100 had a bad chart day. It was the biggest percentage loser of the major stock indexes. And it fell on rising volume. That's bad for two reasons. It continues the pullback from its 50-day moving average -- thereby preventing an upturn in its trend. And its relative strength ratio dropped. That was negative not only for the Nasdaq but for the rest of the market. The blue chip averages, which had been challenging recent highs, also fell on rising volume. Not an encouraging day.
DOW DIAMONDS ALSO DROP ON HIGHER VOLUME ... The Dow Diamonds fell back from a challenge of its late December high. Part of the reason had to do with the fact that its 9-day RSI had reached overbought territory over 70. It's also backing off from its upper Bollinger band. Volume was the biggest in a week. That suggests some serious profit-taking around the recent high. That could pave the way for a test of either its 20- or 50-day moving average which are fairly close together (see green circle).
Chart 2
JUMP IN BOND YIELDS HURTS FINANCIALS ... Aside from technical considerations, the market may have been concerned about a jump in bond yields today arising from Mr. Greenspan's testimony. That also caused some selling in rate-sensitive financial stocks and pushed the Financials Select Sector SPDR (XLF) back under its 50-day average. Its relative strength line has also been dropping over the last week. That raises another concern for the stock market. I've written a lot recently about the importance of technology leadership. Financial leadership is also important. Financial stocks have a long history of peaking ahead of the rest of the market. The only good news today was that the drop in the financial ETF came on light volume. I'm not sure the market can withstand the loss of financial and Nasdaq leadership at the same time.
Chart 3
DOLLAR DROP BOOSTS COMMODITIES... The dollar continues to drop. Its daily chart chart shows the Dollar Index falling after its RSI line reached overbought territory over 70 and major chart resistance near 85. Its daily MACD lines have also turned down. Dollar weakness normally translates into commodity strength. And that's exactly what we're seeing. The CRB Index gained more ground after breaking through its January/ February highs. Gold and copper rose today as did stocks tied to those commodities -- like Phelps Dodge and Freeport McMoran Copper and Gold.
Chart 4
Chart 5
PUTTING IT ALL TOGETHER...
I had been looking for a retest of the recent highs by the blue chip averages and we got one. Unfortunately, that test has failed -- at least so far. The big question now is whether today's setback constitutes a top or just a continuation of a sideways trading range. And what to do with that information. As you know, I've recommended selling into the rally on the belief that it could be the final phase in the cyclical bull market that started in October 2002. I haven't seen anything so far to change my mind. I'll take a more in-depth look at things tomorrow and try to put things together. I don't think it's going to be a bullish story.
You have to pay to read the charts and get his daily updates (often three in a day)
http://stockcharts.com/members/
As of 1/1/05, the Total Return for Kirk's Newsletter since 12/31/98 is 160%. Here are some more periods and comparative benchmarks:
Kirk S&P500 NASDAQ BRKA
2YR: 12/31/2002 +69% +41% +63% +23%
4YR: 12/31/2000 +35% -3% -12% +26%
6YR: 12/31/1998 +160% 7% -1% +27%
- Compound Annual Return from 12/31/98 to 12/31/04 is 17.2%
- Compound Annual Return from 12/31/02 to 12/31/04 is 30.0%
- BKRa is Legendary Warren Buffett's Berkshire Hathaway
- Click for a free issue of my newsletter
- Suitable for the aggressive growth part of your diversified investment portfolio.
Even if you don’t market time or buy individual stocks, my newsletter offers quite a bit of useful information and tables (Discussion of interest rates, The Fed Model, etc.) which many say are worth the price of the subscription on its own.
Support Suite101 and Buy TurboTax Deluxe 2004 Win/Mac
-- posted by Kirk
» Kirk - CLEARING UP SOME CONFUSION
.Fri, 18 Feb 2005 4:6 PM ET
CLEARING UP SOME CONFUSION ...
Some of our readers have expressed confusion on what exactly I'm advising.That's because it may sound like I'm recommending selling the "stock market" at the same time that I'm recommending buying "some" stocks. Here's what I'm saying. I favor taking "some" money out of the stock market. That money is probably best placed in a money market fund which should benefit from rising short-term rates. I've never advocated selling all of one's stocks. What I've advised is to move some of your remaining stock market funds to those parts of the market that are defensive in nature or that benefit from rising commodity prices -- especially basic materials and energy. I believe that commodities are in the midst of a long-term bull market and will be the strongest asset class for years to come. That's not necessarily good for the rest of the stock market because it means more inflation pressures and rising interest rates. And, if the stock market doesn't do that well for the next couple of years (which the four-year presidential cycle suggests), defensive market groups should hold up a lot better.
REVIEW OF ELLIOTT WAVES...
This is as good a time as any to review what I've been writing since the start of the year, and to clarify what advice I've been giving. Rather than repeat everything here, I invite you to review the headlines of my Market Messages since the start of the year. Go to the John Murphy tab and look under "Recent Updates". You'll see the headlines for the last three market messages. Click on "More Archived Updates" and you'll see the headlines for the updates going back several years. Click on any date and you'll get the entire update. You'll see a pretty consistent theme since the start of this year. Many of the 2005 headlines have to do with Elliott Waves. Some of them are "It Looks Like A Fifth Wave Up Is Starting" (February 1); "Market is In Fifth Wave of Fifth Wave" (February 4); and "Don't Wait for a Minor Fifth Wave to Sell" (February 9) . In several of those messages, I wrote about the possibility of a retest of the recent highs by the blue chip averages as part of the topping process. In the February 9 message I wrote "we've either seen the top or we're in the final rally leading to the top". I then advised "In either case, the best way to deal with that is to sell into rallies".
Pay his site to see the charts and more commentary on the charts.
-- posted by Kirk
» Kirk - CRUDE OIL CRACKS $50 -- $55 IS NEXT TARGET
.CRUDE OIL CRACKS $50 -- $55 IS NEXT TARGET... The falling dollar also gave a boost to crude oil which climbed $2.85 and broke through its November/January highs around $50. Chart 5 shows crude breaking the "neckline" drawn over those two peaks, which appears to have completed an inverse "head and shoulders" bottom. That yields a target to $55 which would mean a challenge of its late October peak. Heating oil gained an even stronger 6.5%. The recent buying of energy shares has been warning of higher energy prices. Gold and energy weren't the only big commodity gainers today. In fact, 14 out of 17 CRB components rose today -- and pushed the CRB Index to the highest level in fifteen years.
<img width=520 height=301 src=http://stockcharts.com/def/servlet/Sharp... >
COMMODITY BOOM TIED TO DEVALUING DOLLAR... The CRB Index exploded 6.87 higher today to a new 15-year high. If there's any doubt in anyone's mind about the fact that the commodity boom is being caused by a weaker dollar, compare the diverging trends in the next two charts. The major commodity boom started with formation of a "double bottom" between 1999 and 2002. The CRB upturn at the start of 2002 (see green circle) coincided exactly with a major peak in the U.S. Dollar Index (see yellow circle). Since then, the two markets have been a mirror image of each other. A late 2004 pullback in commodities coincided with January bounce in the dollar. With the dollar falling again, however, commodities have resumed their long-term uptrend. The surrounding lines on both charts are monthly Bollinger bands. Notice how well the 20-month averages (dashed lines) defined both trends. It acted as support on a rising CRB Index; and resistance on a falling dollar. That's what it's supposed to do. So far, there are no signs of a major dollar bottom -- or a commodity top. That's taking a negative toll on the bond and stock markets. And rate-sensitive stocks in particular. MORE LATER.
<img width=520 height=301 src=http://stockcharts.com/def/servlet/Sharp... >
<img width=520 height=301 src=http://stockcharts.com/def/servlet/Sharp... >
-- posted by Kirk
» Kirk - NEXT TARGET FOR FINAL UPWAVE IS 1245-1250 IN S&P 500
.ELLIOTT WAVE UPDATE -- NEXT TARGET FOR FINAL UPWAVE IS 1245-1250 IN S&P 500 -- APRIL IS TIME TARGET FOR POSSIBLE TOP
<img width=520 height=468 src=http://stockcharts.com/def/servlet/Sharp...>
Pay his site to see the charts and more commentary on the charts.
http://stockcharts.com/members/analysis/...
LOOKING FOR 62% RETRACEMENT AT 1250 ... With the S&P 500 having broken out of its recent trading range, and trading at the highest level in more than three years, it's time to revisit my earlier Elliott wave interpretation and came up with some possible upside price and time targets. Let's start with the monthly bars in Chart 1. As far as the technical indicators are concerned, the monthly MACD lines are still positive. The buy signal given in early 2003 is still intact. The monthly RSI line, however, is in overbought territory. That's of some concern, but doesn't prevent the market from moving higher. The question is how much higher. The horizontal lines measure the percentage retracements of the 2000-2002 bear market. The S&P has already moved above the 50% level. That makes the next upside target the 62% retracement level which sits near 1250. There are some other technical measurements that confirm a move at least to that higher level.
Chart 1
TARGET FOR WAVE 5 IS 1245 ... The weekly bars in Chart 2 show the same Elliott waves that I've drawn several times before. My interpretation of those waves is that the rally that started in August of last year from 1060 is the fifth and final wave in the cyclical bull market that started in October 2002. Nothing has changed there. The question is how high can that fifth wave go. The way I prefer to arrive at that upside target is to compare the size of waves 1 and 5. That's because waves 1 and 5 are usually similar. The height of wave 1 is 185 points. That means that wave 5 should be at least as big. Measured from the bottom of wave 4 at 1060, that yields an upside target to 1245 -- which is very closely to the 62% retracement shown in Chart 1 at 1250. [It is possible to arrive at higher objectives by using other measuring methods].
Chart 2
TARGET FOR FIFTH WAVE OF FIFTH WAVE ... Chart 3 shows my interpretation of the wave structure that started last August (the fifth wave). That fifth wave, however, should also show five waves which I've also drawn. This chart suggests to me that the January downturn marked a wave 4 correction. As I've suggested before, that would make the rally that started in early February the fifth wave of a fifth wave. Here again, the question is how high can it go. I'm using the same measuring technique that I employed in Chart 1. I'm assuming wave 5 will be equal in length to wave 1. Wave 1 is 81 points. Adding that to the February bottom at 1163.75 yields an upside target to 1245 which is the same target found in Chart 2. Which is close to the 1250 target given in Chart 1. That doesn't mean to say that the market can't exceed those levels. But it should at least reach them. The next question is when?
Chart 3
APRIL IS LIKELY TARGET FOR A TOP... During the first week of February, I wrote "It Looks Like Market Has Begun Fifth Wave of Fifth Wave" (February 04, 2005). In that report I addressed a possible time target for that last upleg to end. I had earlier recommended some profit-taking during the month of January based on the fact that January marked the end of the seasonal bulge that normally runs from November through the first month of the new year. January also ended the strongest "three month span" of the year and is normally a good time to take some money out of the market. After January, the next strongest month is April. An April rally also marks the end of the strongest "six-month span" of the year that starts in November. The market then has a seasonal tendency to weaken from May to October. Hence the expression "sell in May and go away". That makes April a logical time to do some selling as well. That's why I ended my February 4 message by writing "If the market does move to new high ground, my best guess for a top would be April".
Pay his site to see the charts and more commentary on the charts.
-- posted by Kirk
» Kirk - Gloating Already - 16 Mar 2005
.Wed, 16 Mar 2005 3:17 PM ET
MY MARKET VIEWS AND RECOMMENDATIONS ARE ALL IN THE MARKET MESSAGE ARCHIVES
WHAT TO DO?... With the stock market starting to look toppy, I've been surprised at the number of messages I've received asking what to do in an environment of a weak dollar, rising commodities, rising interest rates, and a peaking stock market. Surprised because that's exactly the scenario that I've been describing since the start of the year. And also because I've been writing about what to do in that environment. For newer readers especially, I recommend that you review some of the market messages posted since the start of the year. You can get there from the John Murphy tab by clicking on "More Archived Updates". Two in particular that you might want to read (or reread) were posted on January 26 and February 18. The first one entitled "2005 Doesn't Look Like a Good Year" discusses the fact that the four-year presidential cycle works against the market this year and next, gives downside targets for a market drop, and explores the idea of a secular bear market January 26, 2005. The last paragraph (Sector Plays) recommends energy stocks (oil service stocks in particular), stocks tied to commodities, defensive groups like consumer staples and healthcare, large cap dividend-paying value stocks, and money market funds. That pretty much sums up my current views.
FEBRUARY REVIEW OF RECOMMENDATIONS ... The February 18 message is entitled: "A Review of My Market Views and Recent Recommendations" February 18, 2005. That message includes paragraphs on rising inflation, rising bond yields, why rising stocks are hurting REITs, and the fact that the basic material/financial ratio has turned up. That message repeats my sector recommendations including energy, commodity-related stocks, defensive stock groups, and money market funds. The paragraph entitled: "Clearing Up Some Confusion" spells out my recommendations even more clearly which include taking "some" money out of the stock market and rotating the rest into defensive stocks or stocks that benefit from rising commodity prices. Paragraph one repeats my Elliott Wave warning that "we've either seen the top or we're in the final rally leading to the top. In either case, the best way to deal with that is to sell into rallies".
OTHER RECOMMENDATIONS... On a global scale, other messages have recommended commodity producing markets like Canada. I've also recommended Japan because of its low correlation to other global markets. In the U.S. market, I've been recommending basic materials, gold, and energy (the latter on pullbacks). I've also recommended avoiding rate-sensitive groups like financials and REITS. I recently recommended utility stocks mainly due to the fact that they pay high dividends. More aggressive traders can do some short selling of the major market averages like the Dow Diamonds (DIA) or the S&P 500 SPDR (SPY). There are bear market mutual funds that rise in a falling market. And there are mutual funds that benefit from rising bond yields. These are all things that can and should be considered. I'm happy to read that a lot of you have been doing your homework. Forewarned is forearmed.
-- posted by Kirk
» Kirk - TIME TO RE-ENERGIZE
.Thu, 31 Mar 2005 2:33 PM ET
ENERGY MARKETS SURGE ... The entire energy complex is rising sharply today -- paced by record highs in gasoline and heating oil. Crude is trading 1.64 higher at 55.63. Chart 1 shows that the uptrend in crude is still intact. The energy complex is leading a strong rally in the CRB Index as well. The CRB is up 4.32 points with all but one of its components in the black. The three top gainers are heating oil (+3.5%), crude (+3%) and natural gas (+2.9%). [Gasoline isn't currently included in the CRB Index]. Weakness in the U.S. dollar is also giving a boost to gold and other commodities. That's also helping energy and basic material stocks which are the day's strongest groups. The surge in energy, however, is short-circuiting the stock market's attempt to rally. Energy stocks look especially strong.
ENERGY SECTOR SPDR BOUNCES OFF 50-DAY LINE... A broader measure of the entire energy sector -- the Energy Sector SPDR (XLE) -- has acted even better than the OIH. Its daily chart shows the XLE turning in an upside reversal day yesterday at its 50-day moving average -- and on very heavy volume. That's a good sign that the recent pullback has been completed. The 9-day RSI line didn't quite reach oversold territory, but the daily stochastic lines did. Chart 7 shows Exxon Mobil, which is the biggest holding in the XLE (23%). XOM is also bouncing off its 50-day moving average.
TIME TO RE-ENERGIZE... A number of you have asked if this is a good time to put some money back into energy or to add to existing positions. My answer would have to be yes. It looks to me like the energy correction has run its course. Unfortunately, that's not good news for the rest of the market which is struggling today. One of the reasons that I have a longer-term bearish outlook on the stock market is the fact that my longer-range outlook for energy remains bullish.
http://stockcharts.com/members/analysis/...
<img src=http://stockcharts.com/def/servlet/Sharp...>
XLE currently at $43.49
[ Kirk's Editor Comment: BEWARE the Double Top in Oil EVERYONE seems so bullish on oil. Goldman Sachs had some report yesterday saying Oil COULD hit $100 if some conditions are met. Yes, and we could have another terrorist attack too. My guess is GS was caught on the wrong side of a trade and needed to talk up its position before unloading. Call me a skeptic, but I just don’t chase things going parabolic. A pullback to the 200 DMA on XLE would be a pitch worth a swing (perhaps with a stop loss)… but not a pullback to the 50 DMA as Murphy is recommending <img width=520 height=301 src=http://stockcharts.com/def/servlet/Sharp... > Be careful out there! ]
-- posted by Kirk
» arommel88 - Re: TIME TO RE-ENERGIZE
In response to TIME TO RE-ENERGIZE posted by Kirk:
I'll throw this in. I think it is smart to focus on energy and energy demand and not just oil but the supply line to the finished product. Energy demand will go up from what we see in Asia. China is not the only thing to watch. India, Russia, Eastern Europe , I expect we will see increase in demand(we will call that a given) the question is how the supply will react? One point that could be pivitol is the heavy, sour crude. It is probably a good idea to look at the supply of refining capacity for those types of oil. That is one of the bottle necks if not the bottleneck. I think the issue will be decided there barring any surprises.
If any spare wellhead capacity still exists, it is for crude that is both heavy and sour. The refineries that are equipped to refine this type of crude are currently operating at 100% capacity. Compounding this problem is the fact that the world's light sweet crude supply is also in decline. Almost 90% of new oil projects produce oil that is either sour, heavy, or both.
http://www.energybulletin.net/4559.html
Here is another link on that subject.
http://www.energybulletin.net/2341.html
"To answer the question, is there a shortage of oil at the moment? We have to ask, a shortage of what oil?" said Bruce Evers, an oil industry analyst at Investec Securities. Many heavyweight producers such as Saudi Arabia, Venezuela, Kuwait and Iran produce large quantities of heavy, sour crude with a high sulphur content.
Recent hurricanes in the Gulf of Mexico caused shutdowns of sophisticated US refineries set up to handle heavy crude from Venezuela.
Bottom line, watch like a hawk the ability to make finished product from lower grade oils. Note the barrier "sophisticated" US refineries. There may be money in who makes them and it may be a good to know when it may come to bare on the oil market. Spare capacity in that area I think is the key.
-- posted by arommel88
» Normxxx - Re: TIME TO RE-ENERGIZE
In response to TIME TO RE-ENERGIZE posted by Kirk:What we have is a growing refinery shortage and growing oil reserves-- I don't see how that helps the price of oil!
Plus, the SPR will be full up by summer.
-- posted by Normxxx
» arommel88 - Re: Re: TIME TO RE-ENERGIZE
In response to Re: TIME TO RE-ENERGIZE posted by Normxxx:But the reserves are not in sweet crude and we don't have the refineries for heavy sour crude. That helps the price of light sweet crude and refinery equipment. Even if the sour crude comes on line the large cost of capital will have to be recovered and this keeps a premium on sweet crude. Whoever buys the sweet crude does not need the expensive refinery.
-- posted by arommel88
Please follow the guidelines set forth in the Suite101 Posting Etiquette when adding to the discussion.